Comments

Assege HaileMariam, Ken Baker and I invite the campus community to participate in the 2011 strategic planning process. We hope to have stimulating, productive discussions that will prepare us to educate the next generation of students and help us build a sustainable future for EIU. William Weber

Financial Sustainability



About This Concept Paper

Mike Dobbs (Chairperson), Mike Maurer, Ryan Siegel, Grant Sterling, and William Weber formed the subcommittee responsible for preparing this concept paper.

This concept paper was first posted on September 14, 2011.

Download the printable version.


Background

EIU reached a pivotal point in its financial history in 2005—that was the first year tuition revenue exceeded state appropriation dollars (see Figure 1). Prior to that time, the state of Illinois allocated sufficient funds to pay for at least half of the direct educational expenses of in-state students attending Eastern. In the years following 2005, however, state funding levels continued to decrease in real terms. These decreases were largely overcome through tuition increases, greater operational efficiencies, and creative and collaborative new initiatives (e.g., the renewable energy center). However, the limits of increased efficiencies and tuition hikes seem to be fast approaching; and new strategic initiatives will most likely have to be self-funded, funded from further efficiencies, or funded from the reallocation of existing resources (e.g., cuts to other programs). What follows is a brief recap of the financial condition of the university and its environment and preliminary conclusions regarding the financial sustainability of EIU.

While there are several sources of revenue for the university (e.g., tuition, fees, state appropriations, gifts, etc.), state and federal law dictate limits on the use of funds. Funds generated by many of the non-instructional operations of the university fall into an accounting category of “auxiliary” services, meaning they are essentially self-funded (i.e., the users pay for services rendered) and little or no state appropriations are used for them. Decreasing state appropriations, therefore, disproportionately affect the instructional operations of EIU, an institution historically and comparatively underfunded already.

Lessons Learned

EIU has long been a leader in Illinois higher education regarding economic efficiencies and low costs. These efforts were expanded even further the last few years as state funding levels dropped. Here is a partial list of cost saving measures.

Changes to the Method of Providing Instruction

Whereas in the past the vast majority of classes were taught by full-time, tenured professors, the university has saved money by reducing tenure lines and increasing non-tenure-track or adjunct faculty positions, and by increasing graduate student teaching. Annually contracted (non-tenure-track) faculty have swelled from providing 13% of the instructional force in 1990 to 31% in 2010. In addition, a hiring freeze has contributed to a 60 headcount reduction in faculty and staff (as of Spring 2011), made possible in part by assigning larger class sizes and heavier workloads to the remaining staff. Further substantial savings have been made by increasing the number of courses offered through the School of Continuing Education. The instructors of such classes receive a substantially lower pay rate, and in the majority of cases accrue no other benefits (health insurance, etc.). These methods all reduce the per-student instructional expenditure by the university, but also possibly impact the quality of instruction and curricula.

Conservation Measures

EIU now features the lowest energy cost per square foot among all the state universities. From 1996–2009, EIU reduced electric consumption by 35%, reduced coal consumption by 7,000 tons per year, and reduced water consumption by 45%.

In addition, EIU negotiated energy performance contracts that have allowed us to lock in energy rates at levels below what they would otherwise have been. In an era of rapidly rising costs, EIU has done an outstanding job of cushioning the harm to the budget.

Deferred Maintenance

The current replacement value of the appropriated buildings at Eastern is roughly $400-million, with an additional $100-million in utility infrastructure. To stop the accumulation of deferred maintenance, an annual reinvestment of 1.5% of current replacement value is recommended by industry. This would equate to $7.5-million per year that the state and university would need to invest. By paying only about $2-million per year towards deferred maintenance, Eastern has saved money but has accumulated $150-million of deferred maintenance across the appropriated buildings and the utility infrastructure. (Deferred maintenance is not as much of a problem in non-appropriated areas such as Housing and Dining, the University Union, Athletics facilities, etc., since those areas fund maintenance out of their own income.) As deferred maintenance levels increase there is also a greater risk of a major building or infrastructure failure that would necessitate the allocation of even greater funds for emergency repairs.

State Trends and Issues

With the current state budget crisis, a return to the funding levels of 2002 will not occur. The best EIU can hope for is continued funding at the current level (which, due to inflation, still represents a de facto reduction), but deep cuts are also possible. This issue is complicated by the debate about whether higher education is a public good (i.e., something that provides benefits for the citizenry as a whole) or a private good (one that benefits only the student who receives the degree). In any case, it seems certain that the structural shift from “state-funded education supplemented by tuition” to “tuition-funded education supplemented by state funds” will be a permanent fact of life for EIU.

One factor that might work in EIU’s favor is the possibility that the general model by which the state funds higher education may change. Substantial disparities in state funding per full-time-equivalent (FTE) student have developed in Illinois over time (see Table 1). For EIU to achieve parity with the next-lowest-funded Illinois university would require more than $5-million in additional funds from the state each year. These differences might be justified if other universities performed substantially better than EIU, but there is no positive relationship between state funding levels and retention rates or graduation rates. Beginning in FY 2013, the governor’s annual budget request must incorporate performance-based funding for higher education, and this must be implemented within two fiscal years. While this may seem like good news for EIU, the actual impact of this change is uncertain. It remains to be seen what metrics will be selected and how they will be weighted. Further, it is by no means clear that any additional resources will be allocated by the state, or that performance-based funding will be a substantial element in the system of calculations that determines EIU’s share of state appropriations. (Although a number of states have enacted performance-based funding, the actual funding has been linked to a relatively small amount of money—usually 2–7% of a university’s budget.) Further, such a funding system has raised concerns that educational quality will suffer as universities strive to retain and graduate students even if they are unprepared. In sum, it would be unrealistic to expect that performance-based funding will generate large-scale adjustments to EIU’s state funding allocation over the next 2–5 years. Even over the long term, the expectations for favorable adjustments in the funding formula should be conservative.

Another unfortunate trend is the increasing number of costly unfunded state mandates. These changes and others like them have produced $6.5-million in identified and quantifiable costs thus far, and further costs are coming. While certain changes are reasonable and beneficial (e.g., adding sprinklers in the residence halls at an estimated cost of $1.9-million per year through 2013), when the state provides no funds to implement these changes it further burdens an already strained budget. EIU and other universities have asked for relief from some mandates (in lieu of additional funding), but thus far these appeals have been unsuccessful.

Alternative Financing Issues and Choices

In addition to traditional fundraising, Eastern and other universities have sought new revenue streams. There are typically two types: 1) non-traditional academic programs that bring in new tuition dollars and may be used to help finance the university’s academic and general operations, and 2) new or expanded auxiliary operations that generate non-tuition revenues by extending the university’s programs to new audiences, times, or locations.

New tuition revenues can be generated from increased outreach to senior citizens, working professionals, international students, and off-campus students. Eastern has developed programs for these audiences with programs like the Academy of Lifetime Learning and the Bachelor of General Studies degree. Programs are also offered outside of the traditional academic year, such as summer sessions and the winter weeks between the fall and spring semesters. Although Eastern does not presently have a formal “winter intersession,” Eastern’s summer sessions produce more than 20,000 student credit hours per year, which according to data provided by the North American Association of Summer Sessions (NAASS), is about average productivity for the summer months. EIU was recently approved to offer three online degree programs, further expanding online offerings as a way to boost tuition revenue. And off-campus courses have seen strong, often double-digit, growth in the past ten years.

New and expanded auxiliary operations can also generate alternative revenue streams. Non-tuition revenues are usually limited to the auxiliary operation that created the revenue (e.g., bookstore revenues may only be used to support bookstore operations). In a sense, the university has less flexibility with non-tuition revenues, because Legislative Audit Commission Guidelines strictly forbid using these revenues to subsidize other operations. Nevertheless, non-tuition revenues can help improve the university’s overall budget situation and sometimes free up appropriated funds for other uses.

Non-tuition revenues can be grown in a number of ways. Targeted campus event campaigns can stimulate revenues from selling university-branded merchandise. Shuttle bus stops, information kiosks, bike racks can provide a limited amount of advertising space that can be sold. Convenience fees, such as fees charged to expedite transcript services, process credit card payments, or accommodate early move-ins, can help cover some operational costs. Income-generating contracts may result from services, rentals or leases, such as leasing space for cell phone antennas. Eastern holds membership in the Education Advisory Board, which has compiled a compendium of 200 alternative revenue ideas used by universities across the country.

As for fundraising, EIU launched its “Expect Greatness” campaign in the Fall of 2010 with the goal of raising $50-million. As of June 1, 2011, almost $45-million (90% of the goal) was raised. While this has been a tremendous success for the university and many people have worked hard to make it happen, the fundraising campaign may be better viewed as a beginning rather than an end for several reasons. Some of the funds raised were in the form of pledges which may not be received for years or even decades. The four priorities of the campaign (student scholarships, faculty and staff recruitment and support, capital improvements, and new program development) are a smorgasbord of needs, each requiring significantly more funding. And comparatively, the endowment level of EIU is weak. Even when considering endowment levels per FTE student, Eastern is in a vulnerable position given declining state funding and uncertain financial times.

Budgeting

Securing sufficient resources to run the university well is critical, but it is also vital that those resources are allocated wisely. EIU has traditionally used an incremental budgeting process, in which each department or unit is allocated funds based on their budget from the previous year, with minor adjustments required by circumstances. This method of budgeting has advantages. Since a unit’s allocation will seldom change significantly from year to year, long-term planning is possible. The budgetary process is relatively simple, requiring no detailed information about the operation of specific units. The stability of the budget also makes the process relatively uncontroversial, free of rancor, and fast moving. Finally, the decentralization of decision-making allows for significant flexibility to deal with unexpected issues, which is an important feature of a well-designed budgeting process.

However, the system also has significant disadvantages. Most employees feel that they have no input in the process, since no public discussions take place before the budget is determined, and only a small handful of administrators take part in the process. In practice, then, budgeting is more top-down and lacks meaningful dialogue. The stability of the process works well when the university’s income and expenditures are also stable, but if there are significant reductions in income, changes in sources of income, or cost increases in some areas it becomes difficult to make budgetary changes in a well-reasoned way. Perhaps most importantly, the budget is almost completely divorced from any planning process at the university level. Some units that are peripheral to the university’s mission may receive a substantial allocation of resources while crucially important units are under-funded because these proportions were fixed decades ago and have never been re-examined.

Eastern is in the process of implementing several new budgeting procedures including a new 30-member budget advisory group, new budget reporting tools, and increased use of line-item budgeting.

Conclusions

Given this information, then, the following conclusions appear reasonable:

  1. State appropriations are likely to continue decreasing (at least relative to inflation).
  2. uition increases at the levels of the last 10 years are unsustainable.
  3. While other sources of revenue are available, they appear unlikely to generate substantial new funding for instructional operations in the near future.
  4. Hence, all new initiatives will most likely have to be either self-funded, connected to new efficiencies, or supported by reallocations of existing resources (with consequent cuts in other programs).

In such an environment, it is imperative that careful consideration of costs takes place before any new initiatives are implemented—further, even beneficial projects are unwise if the resources to support them crowd out other, even more crucial priorities. Existing projects may need to be reviewed during the budgeting process to see if they are absorbing resources better used elsewhere. No single “magic bullet” solution is likely: a combination of approaches is needed.

Table 1.

State Funding Levels, Retention Rates, Graduation Rates, and Required Funding Changes to Achieve EIU Funding/FTE Parity for Public Four-Year Master’s Degree Comprehensive Universities in Illinois.

Institution State Funds Per FTE Student Retention Rate Graduation Rate Parity Funding Requirement
Chicago State $8,814 58% 14% $39,827,200
Western Illinois University $5,261 74% 59% $5,007,800
University of Illinois – Springfield $6,963 74% 67% $21,687,400
SIU – Edwardsville $5,779 71% 46% $10,084,200
Northeastern Illinois University $6,086 67% 20% $13,092,800
Eastern Illinois University $4,750 79% 58% $-

About EIU

Eastern Illinois University is a comprehensive institution, fully accredited by the Higher Learning Commission of the North Central Association. The university is located on 320 beautifully landscaped acres in Charleston, Illinois. Eastern provides the total education experience, while maintaining those personal relationships that its students expect and value. Offering 47 baccalaureate and 25 master’s degrees, Eastern enrolls more than 11,000 students in undergraduate and graduate programs. Small class sizes allow close individual attention and guidance by faculty known for their excellence in teaching, research, creative activity and service. During its 116-year history, Eastern has enriched the lives of generations of students and established a lasting reputation for excellence. The university’s reputation reflects its mission to provide superior, accessible undergraduate and graduate education in the arts, sciences, humanities and professions.


Six Strategic Themes